I resolved to know nothing while I was with you except Jesus Christ, and him crucified
-- St. Paul, I Corinthians 2:2

Friday, September 14, 2007

What about usury?

In my August post about the "sub prime lending" problem, a couple of posters complained that I didn't discuss usury. I might point out, neither did they.

I wonder if they discovered what I did: that the Catechism of the Catholic Church says almost nothing about it, other than saying its a bad thing.

So what is usury? It's lending money at excessive interest. At one time in the tradition, it was understood as lending money at interest at all, but the Church came to see that there is time-value to money, and that it is not in itself illegitimate to charge a reasonable interest for the use of money, any more than it's wrong to charge a reasonable rent for the use of property.

341. Although the quest for equitable profit is acceptable in economic and financial activity, recourse to usury is to be morally condemned: “Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them”. This condemnation extends also to international economic relations, especially with regard to the situation in less advanced countries, which must never be made to suffer “abusive if not usurious financial systems”. More recently, the Magisterium used strong and clear words against this practice, which is still tragically widespread, describing usury as “a scourge that is also a reality in our time and that has a stranglehold on many peoples' lives”.

Common sense tells us that with lending comes risk--and a lender has to be able to cover that risk, or else lending would cease. Does anyone think we would be better off without lending as a tool of finance?

So back to the sub-prime situation. I guess what commenters want me to say is usury is bad. It is. But since the key distinction lies in "excessive" interest, then how shall we determine what is "excessive"?

I really don't know. So, while I readily believe some of these lenders were usurious, I don't happen to know which ones. Nor do I really have much confidence in the various attorneys general or other politicians who get on the warpath about such things, that they are going to make suitable judgments.

Here is an interesting situation involving something that seems clearly usurious: so-called payday loans. Unfortunately, I can't find the link, but a few weeks ago, I read something surprising. A non-profit agency decided to try to offer pay-day loans at the minimum amount necessary to break even--and the rate, when risk and defaults were taken into account--was surprisingly high. That isn't surprising, really, is it?

But we all recoil at the idea of people being charged exhorbitant rates for such things, or for check-cashing.

I'll leave it to you to suggest how we know when the interest charged is "excessive." Let us move onto the next question: what do we do about it?

If you say, the state should regulate it, should cap the interest rate, my response is, okay, fine--then what?

Do you really suppose the folks who were getting such loans will still get loans at the better rate? Some perhaps, but not all. So what will they do?

You and I know full well what they will do: they will get loans other ways. We know from whom, too. The mob charges usurious rates, and has other ways to deal with default, and the reasoning, while abhorrent, is otherwise sensible: they can't sue you, so how do gangsters enforce their claim on the debt? They cause some other harm.

Now, of course, we can go after such rackets and we do.

But I do think it's good to ask whether we need to outlaw everything that is morally abhorrent. Sometimes we realize that the solution is a lot harder to identify than the problem.

Someone will make a facile comparison with abortion: i.e., since we seek to outlaw that, then we must seek to outlaw everything that is wrong. But of course that's not true. Sometimes the difficulty is in identifying a workable solution; sometimes it has to do with the gravity of the wrong. The greater gravity of abortion should be manifest; plus, it is a very clear-cut wrong, whereas the definition of "usury" hinges on very subjective or situational elements of "profit" and "excess."

So, you wanted a post on usury. Usury is bad. Don't do it, you may go to hell.

12 comments:

I agree with you, Father. Kind of hard to say how much is too much. I tend to believe the free market can determine what is appropriate. Most of the people who get "used" (not sure if that's the right terminology) are in trouble through their own fault. They racked up credit card debt and they don't know how to save. Your credit score is not that hard to keep intact. I think there's a lot more sin going the other way, i.e., consumers defaulting on cards and loans, than there is consumers being "victimized" by loan companies.

At any rate, it's nice to see a priest use the word Hell once in a while.

While I agree that it's hard to define usury, I am inclined to think that there is considerably more usury in the world of revolving credit than in installment loans. That is, most installment loans (cars, boats, homes) are based on the combination of the prevailing inflation rate, international currency exchange rates (as applicable) term of the loan and the overall risk to the lender of default and loss of collateral. (Cars and boats have a shorter life, so there must be concern about the item being paid for before it's inherent value is lost.)

Revolving credit (credit cards, mostly) involve complex calculations and usually exorbitant interest rates (often they use low-rate come ons to entice customers and jack up interest rates when customers have "max'ed out" and are unable to make anything more than the minimum payment.

Finally, we have the ultimate usury, loan sharks. These are people who charge interest rates that are intended to lock a person into a perpetual cycle of repayment.

I believe the sub-prime lenders were overly greedy in making loans to people who presented not so much a risk as a near guarantee of failure to repay, and that is cruel, though I wouldn't say it rises to the level of usury.

Father, this is a post that may well dissent from Catholic social teaching. If it's bad, then it's on me.

I think that the relaxation of the teaching on usury was a mistake, and was occasioned by corruption in the church. The reult has been in my mind, disasterous.

Without the availability of capital lent at interests, the modern world of mass produced and consumed material would not have arisen. You need monitary loans for that sort of development. Following on that was shift to materialistic consumption etc, that culminated in the culture we now have--if you can turn a buck at it, it's good. A culture driven and defined by advertising and consumption, in which haveing enough is considered poverty .

Some in the distributist blogs make a distinction between interest for productive ventures, where the lender then shares risk with the borrower, and loans for personal things such as cars, etc.

The first is to be allowed since it can increase property and enhance standard of living, and most of all because the lender then chooses to share the risk of the venture with the borrower and therefore is entitled to some of the return.

The second is condemned as Usury. That would not merely condemn things that "cash stores" but even credit cards, which can arbitrary charge usurious rates.

The most obvious case of usury in our modern society is something we've known about for years: the "payday" companies that offer loans against one's future paycheck at exhorbitantly high interest rates. This is driven home by the fact that three former employees of one of these professional loan-sharking institutions were recently interviewed in the DC area. They admitted that their employers' practices included preying on people with low incomes, especially minorities, to get them to take out additional loans to pay back loans they already had. This kind of nonsense needs to be dealt with.

The problem with the sub-prime lending crunch seems to have to do with mortgages on homes.

Some people think that owning your own home is some sort of right. The simple fact is, some people cannot afford to own their own home. No amount of wishing will make it so. There are some unscruplous people who will lend them the money even though they know they probably won't be able to pay it.

I'd say both parties need to accept a share of the blame, both the borrowers and the lenders.

It is a legitimate development of doctrine because the very nature of money has changed over the last 1000 years from being a simple medium of exchange to being a capital good. This was inevitable due to increased trade, speed of travel, populations, accounting, and the general change in the nature of business as economies moved from agrarian to industrial.

Indeed, the very basis of what "money" is has changed in the last 75 years from species (meaning based on the exchange of precious metals) to fiat money.

The change in the nature of money and the nature of lending at interest was an inevitable consequence of the complication of society, despite distributist moaning to the contrary. I am convinced that Chesterton's error was thinking about a modern economic system based on the presupposition that money was still what it had used to be, if you get my drift.

The Church understood the changing nature of money and clarified its teaching accordingly.

One might even say that there is not "development" of doctrine involved, only recognition that the usury as applied did not fit the reality of the situation.

Father, here is an interesting "White Paper" about alternatives to PayDay lending. It looks like some well-intentioned Credit Unions are deliberately trying to move into that space and help educate people while giving them products that are much less costly than what they get from "for-profit" PayDay vendors.

This is an attempt to state it simply, because if you understand the problem, then you're going to see the solution clearly as well. If it doesn't make sense the first time you read it, try reading it again. Eventually, the whole picture will sink in...

A quick history of money

1) Once, gold and silver were considered the only ''real'' money, but it was heavy and risky to carry around...

2) So people paid goldsmiths to store the money, and got paper receipts for it...

3) After a while, people used the receipts like money, and left the gold in the bank most of the time. So the bankers got clever and came up with a scam...

4) The banks printed off receipts for more gold than they actually had, and ''loaned'' those receipts out to charge interest on it. They had to keep the truth about how much gold they really had a secret and hope that not too many people would ask. This let them make a lot of money charging interest, because they could charge interest on MONEY THEY DIDN'T HAVE.

An analogy can be made using property and titles. Here's the scam in another way:

Step 1: Acquire a vacation home,Step 2: Sell the title to the home to one person,Step 3: Sell the title to the home to a DIFFERENT person,Step 4: Hope they both don't show up on the same weekend!

Fractional reserve banking lets a bank say to a depositor that all his money is safe and sound at the bank, while at the same time they get to loan most of it out to someone else to charge interest on it. So there are two people with a legitimate claim to the same pile of money. So whose is it, really? And where is it?

It gets stranger: when a borrower gets their money, it will end up deposited into a bank as well. This money then becomes backing for another loan, and that loan gets deposited, becoming backing for yet another. If you do the math, you will see that far more money is on deposit in all the banks than existed in the first place! Where does all this money come from? The answer: It is simply CREATED. Since money is not gold, but only paper, banks can ask the Federal Reserve system to just make more!

The story of the vacation home is a good analogy of how banking works today, except for one important thing: there is no home. Without gold, silver, or some other commodity backing it, we have all been trading titles to property that doesn't exist! Paper backs paper, and all they represent are promises to pay. This is the reality of money, and is quite different from how most of us expect it to be.

What's the result?

1) Loaning money while claiming it is still on deposit increases the money supply, essentially creating more money (otherwise deposits would vanish). In essence, for the bank to have your cake and loan it too, it must create more cake. This increase in money supply is the cause of inflation.

2) Almost every dollar that exists is owed to a bank somewhere, because at some time in history, it was created when it was loaned out.

3) The amount of money owed to banks is more than all the money in existence! So we cannot possibly get out of debt under this system. The bulk of this debt is in the form interest, which is an arbitrary amount of money banks demand in return, but never gave.

4) There is no money, in the real sense. Just checks, data stored on computers, and promises. It is all created by typing on a keyboard, and signing signatures. The only tangible assets in regard to money anymore is the collateral we pledge when we ask for a loan. The money they loan you comes from nowhere, but the assets you lose in foreclosure are real!

5) Because the US government borrows from the Federal Reserve, bankers have the power to influence our society and government by controlling finance. They decide to create (or not create) money depending on who's asking, and for what. They choose what projects get funded, and let other needs wither on the vine by starving them of working capital. This subtle yet immense power is more than enough to undermine democracy, and guide the course of a nation's history.

So what's the solution?

Simple. The public must demand that money must not be created by loaning it into existence. It must be something that is openly and publicly controllable, issuable, accountable, and interest-free. Otherwise, a class of parasites will rise to power in society by cleverly disguising the fact that the money they are creating, spending, and controlling us with is MONEY THAT ISN'T EVEN REAL.